Fiduciary Lessons from the Founding Fathers
Anyone who has ever found their grand idea shackled to the deliberations of a committee, or who has had to kowtow to the sensibilities of a recalcitrant compliance department, can empathize with the process that produced the Declaration of Independence we’ll commemorate next week.
Indeed, there are any number of things that the experience of today’s investment/plan committees have in common with that of the forefathers who crafted and signed the document declaring our nation’s independence. Here are four:
It’s hard to break with the status quo.
By the time the Second Continental Congress convened in May of 1775, the “shot heard round the world” had already been fired at Lexington, but many of the 56 representatives there still held out hope for some kind of peaceful reconciliation, even as they authorized an army and placed George Washington at its helm. Little wonder that, even in the midst of hostilities, there was a strong inclination on the part of several key individuals to try and put things back the way they had been, to patch them over, rather than to declare independence and move into uncharted waters (not to mention taking on the world’s most accomplished military force).
As human beings we are largely predisposed to leaving things the way they are, rather than making abrupt and dramatic change. Whether this “inertia” comes from a fear of the unknown, a certain laziness about the extra work that might be required, or a sense that advocating change suggests an admission that there was something “wrong” before, it seems fair to say that plan sponsors are, in the absence of a compelling reason for change, inclined to rationalize staying put.
As a consequence, new fund options are often added, while old and unsatisfactory funds linger on the plan menu, there is a general reluctance to undertake an evaluation of long-standing providers in the absence of severe service issues, and committees often avoid adopting potentially disruptive plan features like automatic enrollment or deferral acceleration.
While many of the delegates to the Constitutional Convention were restricted by the entities that appointed them in terms of how they could vote, plan fiduciaries don’t have that “luxury.” Their decisions are bound to an obligation that those decisions be made solely in the best interests of plan participants and their beneficiaries – regardless of any other organizational or personal obligations they may have outside their committee role.
Selection of committee members is crucial.
The Second Continental Congress was comprised of representatives from what amounted to 13 different governments, with everything from extralegal conventions, ad hoc committees, and elected assemblies relied upon to name the delegates. Delegates who, despite the variety of assemblages that chose them, were in several key circumstances, bound in their voting by the instructions given to them. Needless to say, that made reaching consensus on the issues even more complicated than it might have been in “ordinary” circumstances (let’s face it – committee work is often the art of compromise).
Today the process of putting together an investment or plan committee runs the gamut – everything from simply extrapolating roles from an organization chart to a random assortment of individuals to a thoughtful consideration of individuals and their qualifications to act as a plan fiduciary. But if you want a good result, you need to have the right individuals – and if those individuals lack the requisite knowledge on a particular issue, they need to seek out that expertise from advisors who do.
It’s important to put it in writing.
While the Declaration of Independence technically had no legal effect, its impact not only on the establishment of the United States, but as a social and political inspiration for many throughout the world is unquestioned. Arguably putting that declaration – and the sentiments expressed – in writing gave it a force and influence far beyond its original purpose.
As for plan fiduciaries, there is an old ERISA adage that says, “prudence is process.” An updated version of that adage might be “prudence is process – but only if you can prove it.” To that end, a written record of the activities of plan committee(s) is an essential ingredient in validating not only the results, but also the thought process behind those deliberations. More significantly, those minutes can provide committee members – both past and future – with a sense of the environment at the time decisions were made, the alternatives presented and the rationale offered for each, as well as what those decisions were.
Committee members should understand their risks, as well as their responsibilities.
The men that gathered in Philadelphia that summer of 1776 to bring together a new nation came from all walks of life, but it seems fair to say that most had something to lose. True, many were merchants (some wealthy, including President of Congress John Hancock) already chafing under the tax burdens imposed by British rule, and perhaps they could see a day when their actions would accrue to their economic benefit. Still, they could hardly have undertaken that declaration of independence without a very real concern that in so doing they might well have signed their death warrants.
It’s not quite that serious for plan fiduciaries. However, as ERISA fiduciaries, they are personally liable, and may be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. And all fiduciaries have potential liability for the actions of their co-fiduciaries. So, it’s a good idea to know who your co-fiduciaries are – and to keep an eye on what they do, and are permitted to do.
Indeed, plan fiduciaries would be well advised to bear in mind something that Ben Franklin is said to have remarked during the deliberations in Philadelphia: “We must, indeed, all hang together or, most assuredly, we shall all hang separately.”
- Nevin E. Adams, JD
Indeed, there are any number of things that the experience of today’s investment/plan committees have in common with that of the forefathers who crafted and signed the document declaring our nation’s independence. Here are four:
It’s hard to break with the status quo.
By the time the Second Continental Congress convened in May of 1775, the “shot heard round the world” had already been fired at Lexington, but many of the 56 representatives there still held out hope for some kind of peaceful reconciliation, even as they authorized an army and placed George Washington at its helm. Little wonder that, even in the midst of hostilities, there was a strong inclination on the part of several key individuals to try and put things back the way they had been, to patch them over, rather than to declare independence and move into uncharted waters (not to mention taking on the world’s most accomplished military force).
As human beings we are largely predisposed to leaving things the way they are, rather than making abrupt and dramatic change. Whether this “inertia” comes from a fear of the unknown, a certain laziness about the extra work that might be required, or a sense that advocating change suggests an admission that there was something “wrong” before, it seems fair to say that plan sponsors are, in the absence of a compelling reason for change, inclined to rationalize staying put.
As a consequence, new fund options are often added, while old and unsatisfactory funds linger on the plan menu, there is a general reluctance to undertake an evaluation of long-standing providers in the absence of severe service issues, and committees often avoid adopting potentially disruptive plan features like automatic enrollment or deferral acceleration.
While many of the delegates to the Constitutional Convention were restricted by the entities that appointed them in terms of how they could vote, plan fiduciaries don’t have that “luxury.” Their decisions are bound to an obligation that those decisions be made solely in the best interests of plan participants and their beneficiaries – regardless of any other organizational or personal obligations they may have outside their committee role.
Selection of committee members is crucial.
The Second Continental Congress was comprised of representatives from what amounted to 13 different governments, with everything from extralegal conventions, ad hoc committees, and elected assemblies relied upon to name the delegates. Delegates who, despite the variety of assemblages that chose them, were in several key circumstances, bound in their voting by the instructions given to them. Needless to say, that made reaching consensus on the issues even more complicated than it might have been in “ordinary” circumstances (let’s face it – committee work is often the art of compromise).
Today the process of putting together an investment or plan committee runs the gamut – everything from simply extrapolating roles from an organization chart to a random assortment of individuals to a thoughtful consideration of individuals and their qualifications to act as a plan fiduciary. But if you want a good result, you need to have the right individuals – and if those individuals lack the requisite knowledge on a particular issue, they need to seek out that expertise from advisors who do.
It’s important to put it in writing.
While the Declaration of Independence technically had no legal effect, its impact not only on the establishment of the United States, but as a social and political inspiration for many throughout the world is unquestioned. Arguably putting that declaration – and the sentiments expressed – in writing gave it a force and influence far beyond its original purpose.
As for plan fiduciaries, there is an old ERISA adage that says, “prudence is process.” An updated version of that adage might be “prudence is process – but only if you can prove it.” To that end, a written record of the activities of plan committee(s) is an essential ingredient in validating not only the results, but also the thought process behind those deliberations. More significantly, those minutes can provide committee members – both past and future – with a sense of the environment at the time decisions were made, the alternatives presented and the rationale offered for each, as well as what those decisions were.
Committee members should understand their risks, as well as their responsibilities.
The men that gathered in Philadelphia that summer of 1776 to bring together a new nation came from all walks of life, but it seems fair to say that most had something to lose. True, many were merchants (some wealthy, including President of Congress John Hancock) already chafing under the tax burdens imposed by British rule, and perhaps they could see a day when their actions would accrue to their economic benefit. Still, they could hardly have undertaken that declaration of independence without a very real concern that in so doing they might well have signed their death warrants.
It’s not quite that serious for plan fiduciaries. However, as ERISA fiduciaries, they are personally liable, and may be required to restore any losses to the plan or to restore any profits gained through improper use of plan assets. And all fiduciaries have potential liability for the actions of their co-fiduciaries. So, it’s a good idea to know who your co-fiduciaries are – and to keep an eye on what they do, and are permitted to do.
Indeed, plan fiduciaries would be well advised to bear in mind something that Ben Franklin is said to have remarked during the deliberations in Philadelphia: “We must, indeed, all hang together or, most assuredly, we shall all hang separately.”
- Nevin E. Adams, JD
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